ISMS 29: Larry Swedroe – The Shiny Apple is Poisonous and Information is Not Knowledge
My Worst Investment Ever Podcast
Warren Buffett's Mosaic Theory
Warren Buffett for the first, oh, 50 years of his investment career far outperformed the market and how did he do that? He said, I buy cheap companies that are profitable tend to have low financial and operating leverage. And so guess what? Eventually the world got smart enough and said, you know what? This guy must know something. So firms like dimensional fund advisors, avantas, black rock others went and recreated Warren Buffett's data in high speed computers. Over the last 20 years or so, Warren Buffett has no alpha. But Larry Larry Larry.
In this episode of Investment Strategy Made Simple (ISMS), Andrew gets into part two of his discussion with Larry Swedroe; Ignorance is Bliss. Today they discuss two chapters of Larry’s book Investment Mistakes Even Smart Investors Make and How to Avoid Them. In this ninth series, they discuss mistake number 16: Do You Fail To See The Poison Inside the Shiny Apple? And mistake number 17: Do You Confuse Information With Knowledge?
LEARNING: Trust, but verify even when working with a financial advisor. Don’t confuse information with knowledge when buying individual stocks.
“One of the rules of investing is you should always ask an advisor if they put their money where their mouth is.”
Larry Swedroe
In today’s episode, Andrew continues his discussion with Larry Swedroe, head of financial and economic research at Buckingham Wealth Partners. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks.
Larry deeply understands the world of academic research and investing, especially risk. Today Andrew and Larry discuss a chapter of Larry’s book Investment Mistakes Even Smart Investors Make and How to Avoid Them. In this ninth series, they discuss mistake number 16: Do You Fail To See The Poison Inside the Shiny Apple? And mistake number 17: Do You Confuse Information With Knowledge?
Missed out on previous mistakes? Check them out:
- ISMS 8: Larry Swedroe – Are You Overconfident in Your Skills?
- ISMS 17: Larry Swedroe – Do You Project Recent Trends Indefinitely Into the Future?
- ISMS 20: Larry Swedroe – Do You Extrapolate From Small Samples and Trust Your Intuition?
- ISMS 23: Larry Swedroe – Do You Allow Yourself to Be Influenced by Your Ego and Herd Mentality?
- ISMS 24: Larry Swedroe – Confusing Skill and Luck Can Stop You From Investing Wisely
- ISMS 25: Larry Swedroe – Admit Your Mistakes and Don’t Listen to Fake Experts
- ISMS 26: Larry Swedroe – Are You Subject to the Endowment Effect or the Hot Streak Fallacy?
- ISMS 27: Larry Swedroe – Familiar Doesn’t Make It Safe and You’re Not Playing With the House’s Money
Mistake number 16: Do You Fail To See The Poison Inside the Shiny Apple?
Investment brokers are notorious for enhancing their wallets at the expense of the consumer by disguising or hiding the fees they take. Brokers take advantage of the naivete of the average investor by hiding the high costs in shiny investment assets. For instance, they exploit investors’ lack of knowledge of the bond market through hidden markups and markdowns. They sell bonds with longer maturities to conceal markups and expose investors to price risk.
Investment brokers intentionally make an investment look complex because the more complicated it is, the harder it is for the investor to figure it out. However, always remember that it’s not your responsibility to figure it out. If your financial adviser is telling you something confusing, ask them to explain more clearly. You have that right to know. Trust but verify, is always the basic principle.
If something looks too good to be true, follow Larry’s rule of investing: always ask the advisor if they put their money where their mouth is. Ask to see their investment portfolio.
Mistake number 17: Do You Confuse Information With Knowledge?
Information could be an opinion. On the other hand, knowledge is information that you can use to generate alpha or outperformance. When it comes to owning individual stocks, be careful not to confuse information with knowledge. Unless you have a significant advantage, like inside information, which is illegal to trade on, you shouldn’t buy individual stock. Never assume that you’re the only one with the knowledge.
Whenever a stockbroker tries to convince you to purchase an individual stock, ask them to give you the reasons why you should buy this stock. Also, ask if they genuinely believe they’re the only ones who know these reasons. Larry insists that unless you have some advantage, which you almost certainly don’t, never buy the stock just because the odds are great, you’ll underperform.
About Larry Swedroe
Larry Swedroe is head of financial and economic research at Buckingham Wealth Partners. Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match.
Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has authored or co-authored 18 books.
Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets.
Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect, Advisor Perspectives, and Wealth Management.
[spp-transcript]
Connect with Larry Swedroe
Andrew’s books
- How to Start Building Your Wealth Investing in the Stock Market
- My Worst Investment Ever
- 9 Valuation Mistakes and How to Avoid Them
- Transform Your Business with Dr.Deming’s 14 Points
Andrew’s online programs
- Valuation Master Class
- The Become a Better Investor Community
- How to Start Building Your Wealth Investing in the Stock Market
- Finance Made Ridiculously Simple
- FVMR Investing: Quantamental Investing Across the World
- Become a Great Presenter and Increase Your Influence
- Transform Your Business with Dr. Deming’s 14 Points
- Achieve Your Goals
Connect with Andrew Stotz:
Further reading mentioned
- Larry Swedroe and RC Balaban, Investment Mistakes Even Smart Investors Make and How to Avoid Them
- Philip E. Tetlock, Expert Political Judgment: How Good Is It? How Can We Know?
- Gary Belsky and Thomas Gilovich, Why Smart People Make Big Money Mistakes and How to Correct Them: Lessons from the Life-Changing Science of Behavioral Economics
- Larry Swedroe, Think, Act, and Invest Like Warren Buffett: The Winning Strategy to Help You Achieve Your Financial and Life Goals
The AI-powered Podcast Player
